There is common perception that life insurance policyholders have suffered at the hands of insurers over the past decade. Although this argument holds sway in the investment space the opposite is true for pure protection policies. Compared to a decade ago life insurance policyholders pay between 30% and 40% less premium while benefiting from more comprehensive cover and a range of product innovation. The industry also doubled claims payouts in the ten years beginning January 2001.
In their report titled Innovation and consumerism: How the life assurance industry has changed in just ten years Discovery Life highlights the major concerns policyholders faced a decade ago and the key innovations that addressed them. The first defence against accusations of excess profit in the life industry centres on corporate survivorship. Only five of the top 20 life insurers in South Africa in 1982 were still in business in the new millennium. A second argument is the lacklustre market performance of the JSE Life Assurance index against the JSE All Share index. “The past ten years has seen a move toward consumerism, which has put the policyholder at the centre of the industry and ensured greater efficiency and transparency,” observes Herschel Mayers, CEO at Discovery Life.
Separating risk and investment
Universal life assurance policies were all the rage a decade ago. These products combined risk cover with an element of investment, but were considered “unwieldy and inefficient” by consumers. Discovery notes: “With the universal policy’s poor investment returns, low surrender values and restrictions, consumers needed a change.”
Discovery Life entered the market in October 2000 with a new generation product that separated risk and investment. Competitors followed suit: Old Mutual Greenlight (April 2001), Sanlam Matrix (September 2002), Momentum Myriad (October 2002) and Liberty Lifestyle Protection (August 2003). These products shaved close to a quarter from the base costs of traditional products for the same level of cover. Mayers says the industry shift to pure risk product design has saved consumers R6bn since 2000. This number is derived under assumption that 40% of total recurring premium business is risk-only business and that average premium savings when moving away from universal life policies amount to 20%.
Consumers benefit from lower premiums and more comprehensive benefits. Innovative product design, increased life expectancy and the shift to dynamic underwriting have enabled the industry to further reduce premiums over time. The average premium for R1m life cover (best rates for a 35-year old male, non-smoker) declined from R222/month in 2000 to just R147 today. The same cover for a 55-year old male fell from R772/month to just R469.
The move to dynamic underwriting
“Another driver of the increased premium efficiency achieved since 2000 is the emergence of dynamic underwriting,” says Mayers. Traditional techniques of life industry underwriting required the insured to provide information on a number of lifestyle factors. These factors – including age, gender, smoker status, health condition, level of wellness, hazardous pursuits and socio-economic circumstances – were used to assess the potential policyholder’s mortality and morbidity risks. This technique is far from optimal. A major shortcoming was that life assurance companies only considered the factors at policy inception, thereafter calculating risks using a static underwriting model based on the average experiences of policyholders with similar rating factors. Discovery says this model penalises healthier policyholders.
Modern best practice is to access information about each policyholder’s health and wellness through the life of the policy. “This makes it possible for insurers to price the risk posed by the individual more accurately,” they add. Discovery Life leverages its Vitality wellness programme to assess risk on an ongoing basis. The programme also actively engages policyholders in managing and improving their health status.
From subjective to objective
Disability cover has long been a contentious issue. In 2000 the Ombudsman for Long-Term Insurance received more than 1 000 complaints from unhappy disability cover policyholders. The majority of local life assurance companies have since introduced objective criteria (previously subjective) for judging disability claims, reducing the number of complaints lodged in the latest reporting period to around 350, a 67% reduction.
Objectivity and transparency in the disability product space is of great benefit to insurance consumers. Most companies now use objective medical criteria, benefits no longer taper off with age, more people qualify for benefits thanks to nominated occupation definitions and there are fewer excluded medical conditions.
Editor’s thoughts: In the decade since Discovery Life entered the local insurance market consumers have benefited from numerous product improvements. Discovery has also contributed to South Africa’s ‘global leader’ country status in the field of dynamic underwriting. What innovations would you like to see in the protection space going forward? Add your comment below, or send it to gareth@fanews.co.za
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Added by Joe, 28 Apr 2010